Topdanmark A/S

CSE:TOP

Earnings Call Transcript 2022-Q1

[Peter Hermann, executive]

Good afternoon, everybody, and good morning to the U.S.A. Thank you for joining us at this conference call. My name is Peter Hermann, and I'm the Group CEO of Topdanmark. With me is our Group CFO, Lars Kufall Beck; and Head of Investor Relations, Robin Løfgren. We are hosting this conference call because earlier today we published our interim report for the first quarter of 2022. And I would like to start with a few opening remarks before handing over to Lars for comments on the results in more detail.

In terms of the first quarter of 2022, there's no doubt that our financial result is affected by the 2 large storms hitting Denmark in late January and early February, one of them being the worst storm to hit Denmark in 6 years actually. In addition, volatile financial markets following the war in Ukraine has affected our investment result. But if we try to look through this volatility, our underlying performance in Q1 has actually been quite strong with an underlying combined ratio of 81%, and I'm pleased to see continued strong results of our ongoing efficiency and pricing initiatives. But before Lars takes over, then he'll take us through the results in more detail, first, let me comment on a significant piece of news we released last month.

Slide 2, please. We have agreed with Nordea that they will acquire our life insurance operations pending relevant regulatory approvals. This is a milestone in Topdanmark's history as we now part ways with a business unit that we established 50 years ago. But I truly believe that our Life division has found a very good owner to help the division develop in the future. And let me stress that this is in no way changes the strategic agenda and focus of ours as we will continue our efforts to realize the full potential of one Topdanmark while distributing life and pension products now through a distribution agreement with Nordea.

But this will be further strengthened and deepen the existing partnership between us to the benefit of our customers. And with the announcement of the transaction, we also disclosed a range of financial information. And the main conclusion is that nothing has changed in this respect since the announcement. The sales price corresponds to a goodwill payment of DKK 1.5 billion, but the divestment also entails around DKK 0.3 billion of extraordinary expenses related to the transaction, unwinding and restructuring.

So the net gain is DKK 1.2 billion after tax and will be booked upon closing, although the unwinding cost will be booked on ongoing basis towards closing, while part of the restructuring cost will be booked under other items in the non-life. All else equal, the transaction will lift the solvency cover by 150 basis points, reflecting a solvency requirement decreasing to around DKK 2 billion. Thus, the transaction will free up around DKK 3 billion of capital, which is a clear extraordinary dividend potential. And further, we will revert at a later stage with our reflections on what level of solvency cover will be prudent for a pure non-life insurance company. The transaction is conditional on relevant regulatory approvals and is expected to close in the second half of 2022.

But Lars, will you take us through the Q1 results in more detail, please?

[Lars Beck, executive]

Thank you, Peter. And yes, I will, turn to Slide 3, please.

So looking at our financial result for Q1, our profit after tax amounted to DKK 115 million. The result is affected by 3 items that I would like to address, high weather-related claims due to the storms, negative investment return following market volatility and a one-off adjustment of pension yield tax in the illness and accident business within life.

In terms of the technical result, we delivered a combined ratio of 86.9% and a growth in non-life of 4.1% in the quarter. Profitability was affected by DKK 163 million of weather-related claims, stemming largely from the 2 storms we saw in Q1. In addition, the claims frequency in travel insurance normalized quicker than we had anticipated and is now back at pre-COVID levels. However, as Peter mentioned, underlying combined ratio shows completely different picture, which I will comment on in a minute.

In terms of premiums, we are seeing continued good growth rates in general, partly driven by our pricing initiatives, but also by up and cross-selling to new and existing customers. Our partnership with Nordea continues to deliver strong results with a referral rate twice the size of the old Danske Bank agreement. In Q1 alone, the Nordea agreement has led to more than 18,000 referrals and has thus more than compensated for the outflow from the old Danske Bank agreement in terms of premiums. And we do expect this trend to continue throughout 2022.

The investment return was negative by DKK 142 million in Q1, clearly impacted from volatility stemming from the war in Ukraine and rising inflation. Stock markets have underperformed substantially in the quarter and interest rates have risen sharply. However, our performance is on par with index for most asset classes and we have not rebalanced our portfolio during Q1.

The profit on discontinued business amounts to DKK 10 million after tax. The life insurance result was largely in line with expectation, whereas the result of illness and accident was negative DKK 48 million, and that was affected by the rising long-term inflation expectations and a one-off adjustment of liable pension yield tax for 2021. And lastly, our solvency cover increased to 221% from the 204% in Q4, and this was mainly due to a decrease in solvency capital requirement caused by lower stress on equity exposures and the rising interest rates.

Now looking further at the combined ratio, please turn to Slide 4. As promised, let me try to outline a little bit on the dynamics here. First, what we have done is to adjust the reported combined ratio for weather-related claims, large-scale claims, runoff, changes in risk margin and discounting, as well as the COVID tailwind that we experienced in Q1 2021. Doing so, we are able to see the underlying movements in our profitability and our combined ratio, and the result speaks for itself.

Underlying combined ratio for Q1 2022 was 81%, a 4.5 percentage points lower than in the same period last year, among other things reflecting the strong improvement in underlying claims trend, for instance, within house insurance, where the claims trend is down by 17 percentage points quarter-on-quarter. This is very encouraging and a testament to the fact that our significant efforts within the efficiency program brings tangible profitability enhancements to our portfolio.

Please note, however, when looking at this and looking at this throughout the year 2022, the illustrated figures continue to include the synergies between non-life and life of around DKK 80 million to DKK 100 million per year until closing of the divestment. So that tailwind we still have and continue to have in our numbers throughout 2022.

Slide 5 please. Also touching upon the topic of inflation, clearly, Q1 has brought even more attention to that. A topic that we have already been discussing for some time now. As a result of the war in Ukraine, inflation has continued to surge. Specifically, energy has seen significant price increases. This also puts pressure on certain product lines such as energy-consuming building materials. Due to the rising inflation, we are seeing early signs of decreasing demand from new construction in Denmark and also from private consumption.

So far, the current levels of inflation are manageable for us, not least due to the procurement contracts with fixed positions we've made. But naturally, we continue to monitor and follow-up the market development very, very closely, and we remain ready to act if necessary to protect our profitability. Please note that building materials is only part of our restoration cost as labor cost makes up around 85% of the total cost. And even though we are seeing higher inflation at the moment, let me also reiterate that we over time still and continue to expect to see between 2% and 4% inflation in claims expenses varying between business lines and also over time, we aim to defend our profitability by pricing at least in line with inflation.

Peter, will you comment on the updated profit forecast for the year, please?

[Peter Hermann, executive]

Yes. Thank you, Lars, and maybe if you want to go to Slide 6, please.

Turning to the profit forecast model for '22, we had lowered the assumed combined ratio for '22 from between 85.5% and 88% to now between 83% and 86%, excluding potential runoff in Q2 to Q4. This is mainly due to the reclassification of illness and accident to discontinued operations. Underlying improvement trends within house insurance, as Lars mentioned, and higher discounting offset the headwinds from the high weather-related claims in Q1 and also faster than anticipated normalization of claims frequency in travel insurance.

The assumed premium growth for 2022 is lowered from the 4% to 5.5% to now 3% to 4.5%. That is solely due to the reclassification of illness and accident to the discontinued operations line. The underlying business momentum remains solid. The assumed profit after tax from discontinued operations amounts to DKK 1.3 billion to DKK 1.35 billion, including the expected net gain of DKK 1.2 billion from the divestment of life. And note again, as Lars mentioned, the synergies between non-life and life of around DKK 80 million to DKK 100 million per year, they are still included in the forecast until closing, and that is assumed to be at the 31st of December 2022 in our numbers.

So in conclusion, the post-tax profit forecast model for '22 has increased to DKK 2.25 billion to DKK 2.5 billion, excluding the runoffs in Q2 to Q4. That was the last slide, maybe Slide 7, please.

And that actually concludes our opening remarks. So we are now ready to your questions. [Operator Instructions] So operator, may we have the first question, please.

[Operator]

[Operator Instructions] Our first question comes from the line of Jakob Brink at Nordea.

[Jakob Brink, analyst]

First question on the guidance upgrade on technical profit. So the midpoint of your guidance upgrade is around DKK 125 million compared to the one you gave at the end of last year. Just trying to do the math here and based on your wordings, it seems like a pretty big chunk must be coming, a positive must be coming from the house risk. So basically, illness and accident discontinuation is DKK 100 million. Runoff was roughly DKK 50 million. Weather and travel is around DKK 80 million each. And interest rates, I see you have lowered your sensitivity due to the discontinuation of illness and accident. So basically, it seems like DKK 100 million positive must be coming from house insurance. Does that sound right and why such a big number?

[Peter Hermann, executive]

I'll answer the last thing, Jakob, thank you for the question then. I agree with you. I think actually you are, that is approximate in the numbers we also see in the forecast. It's not only house that is improving, you can say. We have also seen, you can say, improvements in also in agriculture and SME business that we have seen actually. So it's not only house. But of course, house is also a big part of the forecast, you can say, and the bettering here. But it's also other lines that actually improved quite well. So accident has also been quite good. So we see the underlying effects that is actually stemming from our efficiency program is actually across the board here. House is a big chunk of it, but also in some of the other lines.

[Jakob Brink, analyst]

So just to understand, so the travel, I understand from talking to you previously that the deterioration of 80 basis points related to travel is not only related to Q1 but also for the rest of the year. Regarding house, SME and agriculture, as you mentioned, is that only a Q1 thing or did you also include some expectations of improvement for the rest of 2022?

[Lars Beck, executive]

So if I may answer that, Jakob. I think if you look at the forecast and how it's structured up, what we're implicitly saying here is that the headwind we've had in Q1, we are actually offsetting that throughout the remainder of the year. I think you can look at it that way. So in there, there is, of course, an underlying expectation of also improvements for the remaining 3 quarters of the year.

[Peter Hermann, executive]

Regarding travel, when we started travel this year, we thought that there will still be some COVID-19 effects. And that was, you can say, in our forecast, we put that in, you can say, at least for the first 2 and then normalizing during the second half of the year. And what we've seen in Q1 is that we are back to totally normal. So we have the same frequencies and so on as we have experienced. And that means that, that is, of course, both ahead in Q1, but it's also ahead for the remainder of the year.

[Jakob Brink, analyst]

But then regarding the positive DKK 100 million delta to get to your guidance upgrade, is that something you have just seen in Q1 or is it also because something you had seen in Q1, you expect that to continue positively throughout the year?

[Peter Hermann, executive]

Yes. It's the latter. You can see that there's some strong development we see in the efficiency program. You can see that we also expect those to come forward in the rest of the quarters this year.

[Jakob Brink, analyst]

Okay. And then second one, a bit related, but on the DKK 80 million to DKK 100 million synergy still expected. Just could you maybe elaborate on where are those DKK 80 million to DKK 100 million exactly included in your guidance? Is it only in the expense ratio? Is some of it in life? Yes.

[Peter Hermann, executive]

It's pure non-life actually.

[Lars Beck, executive]

Pure expense ratio.

[Peter Hermann, executive]

Pure expense ratio.

[Jakob Brink, analyst]

So basically, whenever you sell it, we should expect sort of the full year cost level to jump up around DKK 80 million to DKK 100 million in non-life. Is that how it's made?

[Lars Beck, executive]

Yes. That is the base case. However, as we also said when we announced that Nordea would buy the life company, we did also announce that, of course, we would not be sitting on our hands, but we would be looking to reduce as much as possible of this effect. However, it will not happen on Day 1 after closing. So it will, of course, take some time to achieve our new, you could say, sustainable cost level.

[Jakob Brink, analyst]

But doesn't that sound, so last year, you made a DKK 240 million loss in illness and accident. Now you've apparently only assumed DKK 100 million loss this year. And at the same time you expect synergies of DKK 100 million. Basically, selling a really loss-making business gives you zero profit boost, that's basically what you're saying then?

[Lars Beck, executive]

What we are saying is that from Day 1 the synergies will disappear, but we will, of course, be looking at defending our profitability to the best possible way. But what we are saying is that we believe it will be tough to achieve the full or defend it in full and it will also not happen on Day 1.

[Peter Hermann, executive]

Regarding, you said something about illness and accident, Jakob. When we entered this year, we also knew that the FSA had published this new rule about that we work on getting the combined ratio down to a combined ratio of 100% at least. And you can say that we also mentioned for you earlier that we have unexpired risk on this product line and you can say the development over the coming years, not saying how many, down to a 100% combined ratio will relieve some of the losses we are already taking, you can say, on our books. So that is included, you can say. So that's the reason why we also said that, yes, we have not thought that illness and accident would get more than 100 negative this year, but that's also combined with the unexpired risk.

[Jakob Brink, analyst]

Yes. Okay. I'm just still thinking it's not a lot to get no profit out of it. DKK 100 million is the gain and then you lose DKK 100 million from synergies. So basically, it's a zero-sum game.

[Peter Hermann, executive]

Oh, you are talking about what you see. But you can say that, yes, if we get rid of some, you can say, negative on the combined ratio and you can say avoid the volatility there, that's one thing, of course. Then we have, as you said, that has, you can say, previously that has been a higher number, right, because we have seen higher deficits on illness and accident and the 100 going towards. And we said that we would actually expect over time to get to 100% on the combined ratio. But when you do that, it doesn't mean that then you will earn the same in the life company because we will probably be, you can say, according to competition, we would probably be forced to make some discounts or rebates on other parts of, you can say, where we're giving the money today, investments or costs or something.

So it's true that if you just take DKK 100 million and DKK 100 million then it seems to be zero. But you can say that we also have received a goodwill as you remember. And we also, you can say, have now and after the closing have a company working with much less capital, which also will have, you can say, a running gain in terms that we don't need so much capital to run the business. So all in all, I still think that the deal is okay also seen from our part.

[Operator]

The next question comes from the line of Tryfonas Spyrou of Berenberg.

[Tryfonas Spyrou, analyst]

In terms of the potential DKK 3 billion dividend to be paid as part of the sale of business, given such a large amount and the potential impact that it could have on the share, have you considered doing a share consolidation scheme in terms of returning the capital? Appreciate that it might be too early to comment, but I thought I'd try my luck. Second question is on, again, on the life business. I sort of modeled the leverage to increase just above 30% in 2023 after you pay out the dividend, assuming unchanged debt levels. Are you comfortable with this amount of leverage or should we expect some management actions to be taken on the debt side following the sale?

[Lars Beck, executive]

I think to answer the first question first about the dividend and whether we were considering doing something on the stock split instead or negative stock split. We are looking into all options. However, it's not something that has matured yet. We are still awaiting, of course, the closure of the deal, which is contingent upon or conditional upon the proper regulatory approvals.

I think in terms of the leverage that you alluded to in forecasting, yes, the numbers look like they do. But I think like last year, the sale of life is putting us in a new position. And the same task we had in the latter part of 2021 about looking at an optimal and efficient capital structure for the company, the same task and exercise we will be going through throughout the second half of 2022 with the expected closure of the deal.

As you can also see, as we have alluded to post sale of life, we will actually be having excess Tier 2 capital compared to what we actually can use. So we will be looking at our balance sheet and our capital structure in total and doing pretty much a similar exercise as to what we did in 2021 in terms of ending the year at a solid and efficient spot.

[Peter Hermann, executive]

And for the Board that you can say, today, we can actually only use the tool of dividend. So we also need to address this and discuss this with the Board if we should do other things too regarding share price buyback and splitting and so on.

[Tryfonas Spyrou, analyst]

Okay. Just on the leverage, would it be fair to say that given you're going to have a more stable business going forward, you'd be willing to run with a bit more leverage or is that not able to say at the moment?

[Lars Beck, executive]

I think that's hard to say at the moment where we'll be running at more or less leverage. I think what we will be looking into, I believe, also in parallel is probably more towards at which level of solvency ratio are we comfortable at running the business. And I think that's probably from a numbers perspective even more importantly. But these things go together. And as I said, we will be looking at this as a whole throughout the second half of '22.

[Peter Hermann, executive]

Okay. Regarding solvency level, we also addressed in our, you can say, start that we will come back with that. But you can say that there will be just things pointing in either direction because, you can say, when you don't have a life company, which is more volatile in terms of investment result and so on and interest level, then you could maybe argue that then we need, you can say, a lower level of solvency to cover the pure non-life. And then you can maybe say on the other hand, when you are so-called smaller business only having, you can say, one item, meaning non-life instead of having also life that, you can say, okay, because we're a little less, that the size is a little less than we were before that could then maybe say, okay, climb a little upwards, but we'll return with that. But at the moment, it's pretty sure that we are well capitalized.

[Operator]

And our next question comes from the line of Jan Erik Gjerland of ABG.

[Jan Gjerland, analyst]

Hello. Okay. Take the next one. I'll call in once again.

[Operator]

So we'll move to the next question, that's from the line of Martin Gregers Birk of Carnegie.

[Martin Birk, analyst]

First of all, maybe a follow-up on your thoughts on solvency, Peter. Wouldn't it be fair to assume that the 170% to 190% should be lower number once you are a pure non-life company?

[Peter Hermann, executive]

It could be. But I think that, again, of course, this is also the question with the Board. But as I said, yes, some things will make it, you can say, we don't need as much, you can say, solvency, capital as we do now due to the fact that the life is, you can say, more volatile. But on the other hand, you can say we are then a little smaller than we were before with having only the non-life. But I will say that, let us return with that, but also we haven't said exactly where it is. But just to let you know, we already think now at the moment that we are well overcapitalized. And then we'll have even more capital after the sale. And then we'll actually can take some possibilities of additional, of course, dividend or other ways to pay it out. And then we have to address what kind of level should we be afterwards. But yes, it doesn't have to be as high as we've said before probably, but we're not getting closer yet, hope that's okay.

[Martin Birk, analyst]

Yes. And then continuing along the lines, I see in this quarter your SCR ticks down by some DKK 200 million. What's the reason for that? And then if I can continue, even deducting the DKK 3 billion, it still looks like that there's room for payout ratio quite nicely above 100% for a number of years to come. Do you think that anyone would raise eyebrows if you actually or if you set the sails for plus 100% payout ratios for, well, let's say, over the next few years or so?

[Lars Beck, executive]

That is a very good question. I will allude to Peter's answer as well. We believe that we are probably very conservatively capitalized at this point in time. And after life, after the sale or the closure, it would be even more so. And naturally, as we've also said before, we are here to serve our shareholders and all our shareholders. And as we cannot currently at least use share buybacks or anything else to return excess capital to the market, it will be through the way of dividends. I think that is as close as we can call.

[Peter Hermann, executive]

And there's only one rule is that it should be above the 70% of a year's, you can say, profit, meaning that it can be over 100%, yes.

[Lars Beck, executive]

And turning to the SCR question, yes, you're right, our SCR has come down by DKK 200 million. It's caused by 2 things. One, the stress to equity has actually gone down in the quarter. The regulation or the rules for how to stress equity scenarios has gone down in the quarter. And then increasing interest rates has also helped us on the solvency part. So you're right, we have seen a positive development of DKK 200 million.

[Operator]

And our next question comes from the line of Asbjørn Mørk of Danske Bank.

[Asbjørn Mørk, analyst]

One basically relating to the slide you had on repricing and inflation. So just trying to really understand your thoughts here. When you say you want to reprice to adjust for inflation, is that basically on nominal terms you want to defend your nominal income or do you want to basically retain your combined ratio, hence, I guess, growing your nominal income in the current environment? What's sort of the ambition from your side here?

[Lars Beck, executive]

The way we stated it and I agree that the semantic is a little bit different this time, but nothing has changed in substance here. What we are saying is that we will not allow inflation over time to dilute our combined ratio.

[Asbjørn Mørk, analyst]

Okay. That was very clear. And then on the discounting, if I may, the 50 basis points in this quarter, but just trying to look at your bridge in the bigger presentation. How much does the discounting makeup of the other end discounting in your guidance? And would you expect some sort of tailwinds from discounting also for the next couple of quarters given the rate developments?

[Lars Beck, executive]

Yes. We would expect a tailwind from that over the next quarters as well. However, on the flip side of that is, of course, also you would not expect a full year impact. Remember that the illustration we have in the slide deck is a full year impact of rate changes. And first of all, they have only changed gradually over Q1. And secondly, of course, then also implicitly, there would only be 3 quarters of impact in the year. But you are right, you should expect. But still, I mean, it still also remain to be seen at what level interest rates will stabilize before, I think, drawing any at least medium-term conclusions on this.

[Peter Hermann, executive]

We have built a little in the forecast.

[Asbjørn Mørk, analyst]

Sorry?

[Peter Hermann, executive]

We have built, you can say, we have built in some positive tailwinds from, you can say, the higher interest rate level that we see now for the rest of the 3 quarters we are going into. So that's part of, you can say, the forecast when we look at both combined and then also the technical result.

[Asbjørn Mørk, analyst]

But very neatly, you haven't added a number to the Slide 13 at least in the bigger presentation. Is it 50 basis points? And could you just give me a little bit of an indication how much of that is discounting?

[Peter Hermann, executive]

I must say, it is around, you can say DKK 50 million so to speak or you can say for the, on a year basis. So that DKK 50 million, I would say, is a good, is a okay proxy seen in the forecast for the year.

[Asbjørn Mørk, analyst]

So other is basically zero in your bridge?

[Peter Hermann, executive]

I can't remember whether there's some risk margin in the other or some other, you could say, changes to some of the other business lines.

[Asbjørn Mørk, analyst]

Okay. But basically...

[Lars Beck, executive]

Asbjørn, I just wanted to make sure that we are looking at the same page. Which page are you referring to, the one on Slide 4 in our presentation?

[Asbjørn Mørk, analyst]

I'm looking at Slide 13 in your extended presentation, assumed combined ratio for 2022.

[Lars Beck, executive]

Fine. So remember also the, let's say, I mean, if you have to do back of the envelope here, DKK 50 million, but then 3 quarters of that as well. The DKK 50 million, only 3 quarters of that.

[Asbjørn Mørk, analyst]

Yes. So basically what you're saying is, you want to retain the combined ratio assumptions or ambitions despite inflation and you have 50 basis points-ish in your guidance so far for the discounting. Okay. That was the...

[Peter Hermann, executive]

There's a risk margin on that as well. There's a little risk margin. As you can see in Q1, we saw, you can say, headwinds from risk margin. You can say that's built into this item as well the other.

[Asbjørn Mørk, analyst]

Okay. Fair enough. If I may just one final question on the synergies on life, the DKK 80 million to DKK 100 million, one of the previous questions, what exactly is it you can mitigate going forward that you wouldn't be able to mitigate if you hadn't sold the business?

[Peter Hermann, executive]

We have a lot. You can say some of the synergies we have, of course, is that when you have more people, for example, on licenses and so on, you can say that you get some rebates in license for IT operations. We have joint IT systems. We have, what about the rent for our property here in Ballerup. We can say there's a lot of things, you can say, that we cannot get out of, you can say, before we turn over the keys from the life company to Nordea.

So of course, we will start to work if we can, you can say, reduce this number, the DKK 80 million to DKK 100 million. But it would be, I think it would be strange if we, after 50 years of chasing synergies, just could destroy, we just will remove DKK 80 million to DKK 100 million in synergies because, of course, we're always working to optimize it. But of course, there will be some additional costs that we have to cover ourselves when life is not part of, you're going to be doing it. But of course, we can also do some restructuring to make that number less. That's also part, you can say, why we have estimated the bill of the transaction, unwinding and you can say restructuring cost to the level of DKK 300 million.

[Asbjørn Mørk, analyst]

But I fully understand the synergies and why they're not going to be unwinded from Day 1. It was more that, if you can, let's say, you can lower the lost synergies by half, so it's going to be DKK 40 million to DKK 50 million going forward. The DKK 40 million to DKK 50 million that you are able to lower lost synergies with, what kind of measures do you need to do? What does that include? And why wouldn't you be able to take that kind of efficiency gain if you still had life in your book?

[Peter Hermann, executive]

I'm not sure I understand exactly what you're pointing at.

[Asbjørn Mørk, analyst]

You're going to lose some synergies when you sell life. I think that's quite obvious. Also why you have scale and you're going to lose some of that scale. But then you say you can mitigate some of that lost synergies going forward in the next couple of years which is, yes, exactly, what is it and why haven't you done it before?

[Lars Beck, executive]

We'll take one example, for instance, one example that Peter used about licenses, for instance. Today, we have a price per headcount for a given license. Tomorrow that price per headcount would, all else being equal, that would go up because we have fewer headcount. Then we can go out, renegotiate probably, maybe even, you could say, pay a penalty to get an early exit from an existing contract and then get a new price that is somewhere in between what we are paying today and all else being equal, the new price would have been with less headcount for instance. I think that is an example of something that we would probably not be able to improve, further improve the price we have today if we were the same headcount tomorrow. But in this situation, we can actually do something to get a reduced negative impact on the synergies going forward.

[Peter Hermann, executive]

And also I understand the question now, Jakob, sorry, Asbjørn, sorry for not understanding again. I think that also that if you look at it, going forward, you can say we will be a pure non-life player, meaning that in the restructuring, we have some ideas how can we maybe build our organization in another way that actually can take away some of the millions we're talking about here that we cannot do today because today we have a strategy actually working towards having both life and non-life and actually achieving synergies to having non-life and life.

So you can say there's also something that our organization structure, the way we build up our business model and so on. And we couldn't chase those synergies when we had life, but if we don't have life, we can do things differently. So that at least we have some ideas on how to do that. And we haven't said exactly how much we could reduce, but I would be disappointed if we still are keeping DKK 80 million to DKK 100 million in 3 years' time or 2 years' time or something. We'll start doing that already now. But of course, it will happen after we have sold life because we also have a lot of work to do separating life. So it's not that easy to do at the moment actually. But I think that within the new structure of being only non-life, there are some things we will do differently.

[Operator]

Our next question comes from the line of Jakob Brink of Nordea.

[Jakob Brink, analyst]

Thank you. Yes. I just had a follow-up please on inflation. So for the past many years, the salary inflation index in Denmark, which you and your competitors use for indexing private lines premiums, has grown more than the consumer price index. And hence, I guess, you could argue that the automatic indexation of premiums has been above the claims inflation automatically with even without doing anything. Now for the first time in at least 8 years, it turned negative in Q4. And especially on construction or housing-related costs, it was extremely negative and also extend on the wider consumer price index. I realize you have procurement contracts in place and then so forth. But I'm just wondering, it seems like the salary inflation or the automatic indexation is no longer enough to cope with inflation. And looking at your price movements, it looks like you haven't really changed prices since January last year. So when do you need to increase again in order not to get behind the curve?

[Peter Hermann, executive]

I would say that if you look at Slide 8, Jakob, then it show that a lot of the inflation we're seeing is within the property and building insurance area. And we have, as you know, also actually, yes, we have actually introduced price increases there also due to our problems with house. But as I also said at that stage, it's not only price saving this, it's also all the other measures we're doing so. And we can see that we are still improving on house. So we're still, we are pretty much in control, both with the things we've done on price and the procurement and our processes on house.

Then if you look at car, for example, then you could maybe also some analyst analysis about, you can say, that the claims inflation could also be around 5%, 6% or whatever. If you look at what we've done on motor here, motor, then you can see that we've also worked with price actually. This actually shows 6% actually change in the average premium here. So we are working with prices. And we have actually, this is not only last year, this is ongoing because you can see they're actually still moving upwards, if you look at the average premiums both on motor, content and house. And that is not only for coverages, that's also, of course, the price on the product.

[Jakob Brink, analyst]

But isn't the reason why they're growing because this is showing the sort of earned premiums. So basically, you did the list price change last year and then it just takes 18 months before it hits your P&L. So isn't that why it looks like it's actually increasing still, but actually it was made by increases you did more than a year ago or?

[Peter Hermann, executive]

Some of it is, of course, but you have to roll it up through that you can say, but it's not that we have done a mass change of price that is the same for all customers. We're doing this, you can say, on a customer level based on their expected risk. So we can say we're changing this as we go. So you can say, when we say average, it seems like everyone has got 9%, for example. That is not true. There's a huge band on this. And the same goes on the other lines. So yes, some of it has been introduced formally, but we have also done changes also actually during the year and last year and the others are still doing. So this is happening, you can say, on a running rate.

[Jakob Brink, analyst]

Okay. Good to hear. And just a small one then. On the investment portfolio, there's a, I see your property exposure has been reduced DKK 400 million. Is that due to illness and accident or what is that about?

[Lars Beck, executive]

No. I think if you look back over the last years and look at the balance sheet of the non-life business, we have simplified the balance sheet and we have also focused in terms of exposure and actually moved out of property in general. And the change you see from year-end is a result of a divestment of 1/2 of a project in Glostrup that was a co-ownership between life and non-life and that has now been sold to life or rather to life customers in Q1. So that means the property exposure in non-life is now purely the domiciled properties here in Ballerup and in Lyngby and from that point of view a simplified and cleaner balance sheet in the non-life business.

[Peter Hermann, executive]

And we're also going towards the sale of life, we will, of course, look into our investment strategy all in all because today as being, you can say, the owner of both the non-life and life, we have the, you can say, also the advantage to have a, you can say, a higher asset under management level, meaning that you can maybe also have more different, you can say, license or activities or list on your joint balance sheet. We will, of course, look into that after the sale of life and look into that strategy and saying, which kind of assets do we want more or less of.

[Jakob Brink, analyst]

Okay. Just on all these changes, so on the investment split and also we talked a few times previously in this call about your new level of solvency. When do you envisage that all those new plans will be rolled out? Is that sort of a December 2022 thing announced with the annual report or do you think it could come sooner?

[Peter Hermann, executive]

I think actually that we have a Board seminar actually in the, I think it's in October. And I can't remember whether it's before or after the Q3. But I think that it's actually scheduled for discussion on the Board seminar there. So it will be in the end of the year.

[Operator]

And our next question comes from the line of Phil Ross at Mediobanca.

[Philip Ross, analyst]

Firstly, on the runoff, there are some negatives on liability and then third party and comprehensive. I think you had issues in the past with liability reserving and that was more to do with operational delays or claims filed. So I just wanted to query what was happening in those 2 areas, please? And then second question, a quick one on automation, Slide 21. Q1 is a sort of slightly lower level than 2021 was. Just wondering if that's a seasonal Q1 impact or whether you think that maybe automation in 2021 was a little bit artificially higher due to some COVID impact?

[Peter Hermann, executive]

The runoff, actually, I would say that historically, we've actually seen some positive runoff from multi-liabilities that's actually driven some of the runoff gains we have seen in a lot of years, but then we're also seeing that, you can say, that the risk premium on most liabilities letting it out being more equal. So this is a quarter and hence you can say, but that's, yes, I don't know.

[Lars Beck, executive]

Yes. We have been looking closely into these numbers because as you rightfully point out, it's different from what we've seen in the past, sorry. And when we look at this, we believe that it's a question of how the winter days or the winter that we saw, the weather that we saw throughout the latter part or very last part of 2021, how that impacts the reporting pattern. So it's not, from our point of view, this is not a run rate issue. It's timing and the timing, in particular, in terms of making sure the practice over the last days of last year versus the weather that we saw.

[Peter Hermann, executive]

And regarding the second question you asked about, what was the share in online claims reporting and also the automation level? Was that the question, right?

[Philip Ross, analyst]

Yes. That's right.

[Peter Hermann, executive]

Yes. You can say, sometimes you can say we also get, one of the things is going, for example, back in one of our process is actually lowering the automation, the share of the automated decision also, for example. Meaning that, okay, then you have a little lower level going through. That has been fixed, of course. But then it's also a question of how your claims is the mix of claims coming in. And actually, we've also seen, as we have also stated, that more claims on health and anxiety, depression, stress and so on. And these kind of claims is normally not something that is done online.

We're actually building solutions for that and then also working quite well, but we've seen more of these claims that is normally by a human being. So some of these things can actually change the picture in a quarter, but we are still aiming for, you can say, both increasing the share of online claims and also you can say getting the automated part up. And I would say that also we're actually, we have some new ambitions saying that over time we'll actually look towards getting 80% of our claims actually automated and decided within 20 seconds. This is not something I'm promising will happen next year, but we are still aiming to actually increase the level both of online claims and also the automated decision by use of machine learning and so on. So that's still a theory. So no changes to the plan or strategy, but more you can say some fluctuations due to the mix of claims.

[Operator]

And our next question comes from the line of Faizan Lakhani of HSBC.

[Faizan Lakhani, analyst]

As for me, I have 3 questions. The first is on the solvency benefit from the change in interest rate. You seem to be quite skeptical in terms of what the stable rate of interest rates are. Can we assume, say, that the benefit you've seen in this quarter from interest rate sensitivity is more of a, not quite a real improvement in solvency ratio from your perspective and the way you think about excess capital. The second question is on the walk on the expense ratio the next few years. Given the sort of moving parts with the synergies, with the efficiency program you're working on, what's the sort of walk of the expense ratio the next few years? And the final question is coming back to the asset mix change, does that lower your investment return once you sort of sit down and decide what the new asset would look like?

[Lars Beck, executive]

Sorry, in terms of solvency benefit from the increased interest rates, I mean, yes, our current balance sheet and our current solvency capital takes it out in what we know right now. And hence, if interest rates does not continue to be at this point, then the solvency will be impacted and that actually goes whether or not the interest rates will go up or down. So I think that's the easy way. It's quite mechanically the way it works in our solvency capital requirement.

[Peter Hermann, executive]

Actually within life business, actually that the interest rates actually affects the solvency conversation because we have these loss absorbing capacity, which is the collective bonus and so on and individual bonus potential. And that will move up and down with the level of interest.

[Faizan Lakhani, analyst]

Just sort of try and understand if interest rates stay where they are at the full year, would you see that as excess capital or would that still be too early to treat it as a stable rate of interest rate?

[Lars Beck, executive]

I don't have, right now, to be honest, we don't have an opinion on that. I think there are so many moving parts here. And I think in that relation, the potential DKK 3 billion excess capital as a result of the sale, I think, is more significant than the potential impact from interest rate level. I think that's the best answer we can give you at this point in time.

[Peter Hermann, executive]

There was the expense ratio going forward? Of course, as Lars already mentioned, the synergies from the life, of course, will have an effect and a negative effect at least from the beginning on the expense ratio. But on the other hand, as we mentioned, we are doing, we will also have, you can say, our efficiency program working with this. Some of those effects will also go into the claims ratio because a lot of them is actually doing and handling the claims cost. And some of them also addressing the expense ratio, but exactly how that will develop, actually, previously, we also said that we also saw the expense ratio going not being higher, but actually going down over time also due to the efficiency program.

Now we'll have a jump, you can say, due to this life. And then from thereon, we still expect that it should move downwards. But we don't have, you can say, a fixed level for it because actually we don't focus only on just getting the expense ratio down. We can do that in multiple ways. But we are, you can say, addressing the combined ratio as the offset of the target we want to get lower over time. So I hope that at least give some, yes, some thoughts about how we look at the expense ratio.

[Faizan Lakhani, analyst]

I'm just trying to understand it with the various efficiency programs, the investments you're doing as well as depreciation, all those aspects. I mean, should we expect sort of a reduction year-on-year or will there be a hump as depreciation builds up and investment cost build up?

[Peter Hermann, executive]

It's true that the depreciation will also affect and that's the reason why we're saying at the moment, whenever we stand still for a year, actually, we've been quite okay because we are doing depreciation and we are investing, as you know, more than we have ever done before. So that's the reason why I'm saying we're not that keen on just getting the expense ratio down and down and down because we also need still to invest in the future. So at least if we can invest in the right way, so we get the combined ratio better, then that's our aim. But yes, we don't have, you can say, a prognosis for the expense ratio to give you at this stage, but it will be affected by depreciation, the life, but also the efficiency program. And we hope to keep it at least stable and hopefully seeing it trend downwards over time. That's the intention and the plan.

[Lars Beck, executive]

And I think in terms of the asset mix and implications of that, I think it's also a question of disregarding the sale of life or not looking at the equity exposure that we have in the non-life business. We are now and it seems like we are moving further into a different territory than we've seen in many years, namely that now money has a price. Money comes with a price. And naturally, that should lead any responsible leadership and management to actually review the asset mix and the investment strategy that we have. So I would not sit here and say that we will have returns either go up or down. I would rather say that, as any responsible management, we are reviewing the investment policy and the investment strategy and that is just the need to do so is just further accelerated by the sale of life.

[Operator]

And we have one further question in the queue, it's a retry of Jan Erik Gjerland of ABG.

[Jan Gjerland, analyst]

I hope you can hear me now. Coming back to Jakob's questions about the premium growth and the earned premium you show on Page 8. How well are you on your written premium inflation growth, so to speak, versus the current inflation as you show the earned premiums here versus the current inflation is already enough? So how certain can we be that you are on the top of the current inflation pace, so to speak, when it comes to pricing aligned with inflation curve at the moment?

[Lars Beck, executive]

I think, as we've also said many times, Jan, first of all, thank you for the question. There's more to inflation and there are more measures than just premiums. But what we have done, as Peter has said, is that we have raised prices already over the last 12 months, continue to look at it. This is not a one-off effect. We continue to, on an ongoing basis, of course, review our pricing and our tariffs and have also come out with a new car tariff here earlier this year.

The key to also helping us in terms of fighting inflation is, of course, our procurement part, where we have early on giving some quite good examples, I think, or tangible examples in terms of restoration business and/or damage control and how that impacts us. And all we can say is that right now with what we're looking into that gives us, I would say, further comfort or further momentum in that what we have been doing in the procurement space is definitely on an ongoing basis continuing to help and further build our defenses against inflation.

[Peter Hermann, executive]

And you can say the earned premium is, of course, the indexation, the price increase, upselling and more cross-selling and so on, new customers and so on. But as you can also see on the private, the 2.7%, that's also affected by some churn. Because when we do price increases, sometimes we also, we're doing, actually doing quite a lot of product notifications changes due to our travel going to a new system and getting even better, you can say, systems and products for our customers. That is also getting some churn. So when you look at the premium growth, that is the result of a lot of things, including also new and you can say customers leaving us.

So you cannot just only compare the premium, the earned premium to inflation, but then you have to look at the bottom line, our P&L combined ratio. And we still think, if you look at the, you can say, the underlying development in the combined ratio, just looking aside that we had a lot of weather-related claims and so on, then actually we still think we are in the right path and actually enhancing the business as we go now.

[Jan Gjerland, analyst]

My next question is the underlying improvement, as I see, you said around tariffs is one part of it. But how much is frequency do you think versus the number of accidents both for housing, SMEs and on the private side when it comes to the underlying improvements? As you said, COVID is behind us, but there is probably something into the numbers. Is it very good frequency at the moment? We see that at least in the onset of the year.

[Peter Hermann, executive]

So I would say that if you look at the frequencies, I would say that, of course, what you compare with, you can say, because if I compare with 2020, then everyone would say that there's a lot more claims now because we had, you can say, tailwinds from COVID-19 in the beginning of 2021. And 2020 was also affected. So if we had to go back to 2019, I know it's a long time ago, then you can say the first quarter of 2021 we had 6% more claims than we had in the first quarter of 2019.

And if we also take into consideration all the weather-related claims, then actually we had 18% more claims in the first quarter than we had in the first quarter '19. And you can say, if I do compare with '21, then the same figures would be almost 16% more claims in the first quarter '22 compared to '21. And with weather, weather is actually almost 30% more claims this quarter than we had in the first quarter '21.

So looking on all the numbers, it's not that frequency has gone down. Actually just if you look at theft, we have seen 50%, 5-0, 50% more theft claims in this quarter than we have actually seen in 2021. So it's not frequencies driving the underlying improvements, but actually our way to risk select and also avoid that average claims explodes and also pricing and so on.

[Jan Gjerland, analyst]

On the disposable income for a household in Denmark, they are probably also seeing inflation everywhere. So when you're putting prices up, as you said, you see some churn. How much would you say that the negotiation on the tariff side, that meaning that they take down their number of kilometers in the car or take down their coverage on the house or just take part health insurance rather than full health insurance as a consequence of you improving your book versus they paying less to you as a consequence of the price increases you have sort of seen over the last year?

[Peter Hermann, executive]

We haven't seen that effect until now, I would say. But I think actually it's a good question going forward with the inflation on all other, you can say things in the society and gas and fuel and electricity and so on. Then, of course, you could maybe see a change in behavioral pattern in our customers. Would they actually insure less or would they actually insure more because what we saw under the COVID-19, you could argue that, okay, now some people also left their job and so they would insure less. Actually, we saw some, you can say, some growth actually, for example, within the personal injury and health insurance product and so on.

So it's a good question, I don't know what will happen in terms of behavioral patterns. I think some will actually insure more. And actually, we saw actually that Deloitte made some analysis actually showing that, actually look at the smaller corporation in Denmark actually more of them said they would buy more insurance actually in these turbulent times than they would otherwise do. So let's see what happens. But at the moment, we haven't seen that has affected, you can say, behavioral pattern and the risk result until now.

[Operator]

And we have one further question in the queue, that's from the line of Tryfonas Spyrou of Berenberg.

[Tryfonas Spyrou, analyst]

Sorry. Just one more question on the topic, following from the topic of theft. You mentioned increased theft recently. I guess more broadly in case we do have a recession and people's income, disposable income drops quite more. Historically, what has been the pattern in terms of fraud in Denmark? Do you expect to see a pickup in fraud, both in terms of private lines and commercial lines as people sort of don't have cash so they try to claim on insurance?

[Peter Hermann, executive]

Yes. Sorry to say that if you look at historical years, then we have seen probably a higher level of fraud actually when there has been turbulent times so. But I think that actually it's difficult to compare to the situation now because in recent years, us and actually also a lot of competitors, we have done way more, you can say, initiatives to actually avoid fraud. So you can say, so the good customers do not have to pay for that.

So we have a lot of new measures and tools and focus on this. But yes, historically, we have seen that the fraud level has gone a little up in turbulent times. But let's see. But it's not much and that's not something that you could see maybe on the combined ratio. But we expect still to actually see, actually detect a little more fraud than we have seen historically. And actually, that's also picking up and that's also part of improvement, but it's not the biggest part but there's still value. But actually, we avoid these kind of claims. But let's see how the macroeconomic conditions will be. We're ready for the effects.

[Operator]

Thank you. And as there are no further questions in the queue, I'll hand back to our speakers for the closing comments.

[Peter Hermann, executive]

Yes. But then thank you all for the good questions and for taking the time to attend our conference. As you know, you're always welcome to reach out to Robin and if you have any further questions. So we wish you all a pleasant rest of the day. Thank you.